Case 11-7 Accounting for Notes Payable

Business transactions often involve the exchange of property, goods, or services for notes on similar instruments that may stipulate no interest rate or an interest rate that varies from prevailing rates.

Required:

A. When a note is exchanged for property, goods, or services, what value should be placed on the note:

1)If it bears interest at a reasonable rate and is issued in a bargained transaction entered into at arm's length? Explain.

2)If it bears no interest and/or is not issued in a bargained transaction entered into at arm's length? Explain.

B.If the recorded value of a note differs from the face value,

1)How should the difference be accounted for? Explain.

2)How should this difference be presented in the financial statements? Explain.